Though the calendar says 1998, food executives are clearly looking ahead to the 21st century. In a series of interviews with SN, top executives at retail and wholesale companies repeatedly cast the challenges of the new year in terms of the next century and what they must do now to prepare for the long-term future. The ramifications of technology are evident in the thinking of many companies, including Fleming Cos., Oklahoma City, which is heavily involved in updating its software for year-2000 compliance, and Roundy's, Pewaukee, Wis., which is hoping to utilize electronic marketing to compete more effectively.
Many companies will continue pursuing efficiency-building strategies, including Associated Food Stores, Salt Lake City, which is looking at opportunities for consolidated purchasing with other distributors for greater efficiencies. Randalls Food Markets, Houston, is looking for ways to differentiate itself and find greater operating efficiencies in the 21st century. Some firms are focusing on merchandising issues, including Hy-Vee Food Stores, West Des Moines, Iowa, which is considering totally new layouts for future stores to accommodate more meal solutions.
However, 20th-century issues are still on the minds of some executives, including the challenge posed by mass merchandisers who continue to take sales away from traditional food outlets, as well as the difficulty of finding entry-level personnel in a surging economy. Ron Pearson, chairman and chief executive officer of Hy-Vee, expressed concerns about the erosion of sales to nontraditional outlets like Wal-Mart, Kmart and Target. He said Hy-Vee's solution has been to steal back some of the discounters' thunder by becoming very competitive on paper goods, cleaning aids, cereal, candy and juice -- categories the discounters have emphasized.
"We've been on a one-year campaign to reduce prices drastically on selected items, including offering some items below cost, to get consumers moving back into these sections in our stores. And in every department where we've gotten more competitive, we are showing sales increases," Pearson said.
Rather than striking back against mass merchandisers only in food categories, Ralphs Grocery Co., Compton, Calif., has opted to be more competitive in major nonfood categories like pet supplies; rubber and plastic goods; and light bulbs, George Golleher, CEO, said. "When they come after us in food, we're going after them in categories in which they are market leaders, which has enabled us to increase sales in those areas," he said.
Finding qualified store personnel is also a major concern for some executives. For Gary Hirsch, chairman and CEO of Penn Traffic Co., Syracuse, N.Y., it's the primary challenge of 1998, he said.
"We must find people one at a time, but we must work on retention as the best way to ensure a qualified workforce," he said. "We can do that by making ours a better place to work."
Pearson also said finding personnel has become more difficult as the economy has improved and service industries have become more aggressive at recruiting. "The industry needs to invest money in recruiting at the college level, getting the story out that this industry is a great place to develop a career. Other industries have done a good job getting that point across, but we as an industry have not."
Looking ahead to the next century, Robert E. Stauth, chairman and CEO of Fleming, said food companies must put a high priority this year on year-2000 projects to make sure their software is compatible with the change in the century. "Those [companies] who are not already involved [in year-2000 efforts] will need to devote 1998 to playing catchup or find it may be too late," he told SN.
"The year-2000 issue is the only thing that can keep a company from moving into the 21st century. But if a company doesn't already have its hands around that issue and it waits too long to do it, then all resources [to assist in the changes] will be taken."
Stauth also expressed concerns about finding the right people to help companies like Fleming deal with future issues. "With things changing so rapidly, and with so many different ways of going to market, it requires skills that many companies don't have today," he said, "and 1998 will be important to sorting out which areas we need to develop for the 21st century and how we can go about developing the people to fill those areas.
"We will have to find new skills and new management thinking to make changes to be positioned to move into the 21st century."
The encroachment of meal solutions from the restaurant industry may force supermarkets to alter the way they merchandise products, Hy-Vee's Pearson said, "so customers don't have to traipse through a 60,000-square-foot store to find meals for tonight. By taking down some gondolas and putting in more refrigerated or frozen-food cases and grouping items differently, we'll move more into meal solutions instead of selling only commodities to make sure we have 21st-century supermarkets when consumers want them."
Hy-Vee is also attempting to adapt its pharmacies to the next century by studying the links between home health care and nutrition, Pearson added.
Rich Parkinson, president and CEO of Associated Food Stores, said distributors must try to achieve greater efficiencies and consolidate their purchasing power to compete in the next century with giant chains.
The executives' complete remarks follow:
chairman and CEO Hy-Vee Food Stores
West Des Moines, Iowa
The shortage of really qualified personnel will continue to loom as a major challenge in 1998. It has been a problem for the last two or three years, as the economy has improved, and it's probably gotten a little worse lately as service industries have been expanding so fast everywhere and the options of who's available get more difficult. I'm talking not only about part-timer personnel, but full-time, as well -- the kind of quality people we need to run major supermarkets in the 21st century.
The answer lies in selective recruiting. The industry has been hurting for years, but we've not done any dramatic recruiting. The industry needs to invest money in recruiting at the college level, getting the story out that this industry is a great place to develop a career. Other industries have done a good job getting that point across, but we as an industry have not.
Another challenge is the continuous erosion of supermarket sales to mass merchandisers like Wal-Mart, Kmart and Target. Those companies are now carrying more traditionally proprietary items in all categories, and they're moving into more and more areas. Obviously, they are developing sales out of that expansion, and we see them picking up business all the time, which has to come out of our industry.
In the past, most retailers did not respond enough. We certainly reacted to club stores by offering club items, but the mass merchandisers are using these items to draw customers, and we have to look at each category of goods they carry and determine if we need to get more competitive.
At Hy-Vee, we've tracked these items for two years and seen dramatic increases among mass merchandisers. So we've been on a one-year campaign to reduce prices drastically on selected items, including offering some items below cost, to get consumers moving back into these sections in our stores. And in every department where we've gotten more competitive, we are showing sales increases, including paper goods, cleaning aids, cereal, candy and juice.
The industry also faces a challenge from restaurants -- the invasion of restaurants moving meals to customers. I think more meal solutions will come in two forms in the supermarket: first, in terms of a fresh response that supermarkets will launch, and second, remerchandising of supermarkets to include a vast array of meal solutions from major manufacturers -- items that are complete meals or that can be put together easily and quickly.
As a result, we will all have to change our merchandising approach and look at stores in a different way, with a layout to accommodate meal solutions more easily so the customer doesn't have to traipse through a 60,000-square-foot store to find meals for tonight. By taking down some gondolas and putting in more refrigerated or frozen-food cases and grouping items differently, we'll move more into meal solutions instead of selling only commodities. At Hy-Vee, we're looking at all of that to make sure we have 21st-century supermarkets when consumers want them.
We're also challenging ourselves to adapt to the 21st century in terms of home health care trends we see emerging and to think about how to adapt our pharmacies with fresh, nutritious products. We have to determine how home health care information and equipment can come together as people seek to prevent health care problems before they occur.
Robert E. Stauth
chairman and CEO
The most unique challenge in the industry in 1998 will be the year-2000 effort, because those who are not already involved in it will need to devote 1998 to playing catchup, or find it may be too late. So the No. 1 priority must be correcting all software that's not year-2000 [compliant] and having the opportunity in the second half of the year and the early part of 1999 to test the software to make sure it does what it's supposed to do. The year-2000 issue is the only thing that can keep a company from moving into the 21st century. But if a company doesn't already have its hands around the year-2000 issue and it waits too long to do it, then all resources will be taken.
At Fleming, we started the year-2000 effort two years ago by outsourcing the work to India. However, there's a tradeoff here involving the time of some pretty talented systems people who have to work on year-2000 issues -- for no return on investment -- instead of working on new concepts.
A second industry challenge for 1998 is developing profitable sales. We can all find ways to increase business, but doing so in a profitable way is more difficult, and that's the No. 1 operational challenge for 1998. What's exciting about the challenge is finding unique ways to approach consumers .
To increase profitable sales at Fleming involves how we go to market and the type of customers we prospect. We plan to become more selective in developing our customer base by seeking out synergies between the retailers' goals and our goals, where both of us are headed in the same direction and it's just a matter of finding each other.
For example, 1998 will be the first year since mid-1994, when we acquired Scrivner, that we will have capital to devote to our corporate-owned stores at the rate we should be. Those funds have been tied up in re-engineering the past few years, but in 1998 we plan to open 24 new corporate stores, compared with 13 in 1997.
A third challenge is developing people for the 21st century. With things changing so rapidly and with so many different ways of going to market, it requires skills that many companies don't have today, and 1998 will be important to sorting out which areas we need to develop for the 21st century and how we can go about developing the people to fill those areas. For example, if we go to full-blown consumer-direct marketing, it will require certain talents that our people may not have that we must find on the outside. We will have to find new skills and new management thinking to make changes to be positioned to move into the 21st century.
A fourth challenge will be the further extension of consolidation. We saw substantial moves in that direction in 1997, and we expect more of the same in 1998, only involving different companies.
At Fleming we are looking for acquisitions. In addition, by the end of 1998, we expect our sell-plan revisions to be in all Fleming divisions except five that have not been converted to the basic software required -- because the people who would oversee those conversions are involved in the year-2000 work. If not for year-2000 [concerns], those conversions would be at the top of our projects list.
Gary D. Hirsch
chairman and CEO
Penn Traffic Co.
For the industry the biggest challenge is employment -- finding people. We find people one at a time, but we must work on retention as the best way to ensure a qualified workforce. We can do that by making ours a better place to work.
For Penn Traffic our challenge is obviously to be successful again by rebuilding our sales base.
president and CEO
Randalls Food Markets
The biggest challenge for the industry in 1998 is the same one that has continued to face the industry for the last several years -- looking for ways to differentiate your business while at the same time trying to be as competitive as possible by becoming a more efficient company to drive costs out of the business. That's a balancing act you're constantly dealing with.
Differentiating our business is particularly important for us because of the type of stores we operate and the customer base we serve -- which are not necessarily the same as the competition's -- so we're always looking for ways to differentiate ourselves. But we're all competing for a piece of the total market, and we do that by providing a different shopping experience.
For Randalls, it goes without saying that we're excited about the future of our business because of our strong partnership with [Kohlberg Kravis Roberts & Co., New York-based investors]. That partnership gives us funding we haven't had in a long time for capital deployment. There are certainly a lot of opportunities within our existing markets to remodel existing stores and build new stores, which has been our focus for the last quarter, and will continue to be our focus going forward.
president and CEO
Associated Food Stores
Salt Lake City
The biggest challenge for the industry is to achieve the true efficiencies we are striving for and to consolidate purchasing power for retailer-owned companies and eliminate duplications of costs and inefficiencies. Toward that end, we've seen United Grocers and Associated Grocers of Seattle trying to come together in a joint [distribution and procurement] venture.
For us to be competitive, we must do what we can to level the playing field in purchasing power, increase efficiencies and reduce expenses. In the past, the reasons for doing so have not been as compelling as those that exist today. But in the western Unites States, with Fred Meyer Inc.'s consolidation activities, the motivation for consolidation is to increase purchasing power, avoid duplication of expenses, reduce expenses and increase efficiencies, and medium-sized companies like ours must do the same things.
chief executive officer
Ralphs Grocery Co.
The biggest challenge for the industry will be the nontraditional companies selling supermarket goods. That issue hit home in southern California in 1997 when Kmart added 10,000 square feet of food to all stores. Kmart and other mass merchandisers think they are experts in selling food, but whether they are or not affects all of us, and we have to be more competitive overall and do a good job in perishables.
At Ralphs, we've attempted to compete with mass merchandisers for quite a while by featuring better pricing in certain categories, and what we've done over the past year has been to take categories the mass merchandisers do well in -- pet supplies, rubber and plastic goods, and light bulbs -- and go after those categories on price. When they come after us in food, we're going after them in categories in which they are market leaders, which has enabled us to increase sales in those areas as a result.
The industry will have to continue to move in that direction as we all look for more creative ways to compete with nontraditional food retailers.
president and CEO
The biggest challenge for 1998 is electronic marketing; the evolution of that whole format. All wholesalers and chains are in the process of fine-tuning their frequent-shopper cards with target marketing. Another challenge is prepared entrees and ready-to-eat meals. These are both challenges and opportunities, and no one has the formula exactly right yet. For Roundy's, the primary challenge is to increase the top line. With food prices stagnant to deflating, that's going to require some acquisitions.